Chapter2

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Unformatted text preview: Chapter Two The Time Value of Money MGMT 109 Managerial Finance Professor Lu Zheng Preview of Chapter Two Preview of Chapter Two • FV of a single cash flow • PV of a single cash flow • FV and PV of a stream of cash flows – The general case – Special cases • Annuity • Perpetuity • Constant Growth Perpetuities • Constant Growth Annuities – Using the time line – example • Compounding (EAR vs. APR) 1 Explaining Interest • In a speech delivered before the Yale Sot Club a decade after his return to New Haven, Irving Fisher related this minor incident to his stay in Santa Barbara: Discovering that the man who came to massage him was a Sot and believed that "interest is the basis of capitalism and is robbery," my father determined to make the most of his pedagogical opportunity. To the question "How much do I owe you?" the masseur replied, "Thirty Dollars." "Very well. I will give you a note payable a hundred years hence. I suppose you have no objection to taking this note without interest. At the end of that time you, or perhaps your grandchildren, can redeem it." "But I cannot afford to wait that long." "I thought you said that interest was robbery. If interest is robbery, you ought to be willing to wait indefinitely for the money. If you were willing to wait ten...
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This note was uploaded on 01/17/2011 for the course MGMT 107 taught by Professor ? during the Winter '08 term at UC Irvine.

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